7.3 DPP Suitability & Tax Basis
Because DPPs lack liquidity and carry severe investment risks, FINRA imposes stringent suitability standards. Furthermore, tax deductions are capped strictly by the partner's tax basis.
Key FINRA Exam Takeaways
- DPPs are suitable ONLY for accredited, high-net-worth investors with high liquidity elsewhere.
- The investor must sign a Subscription Agreement indicating financial net worth and appointing GP as attorney-in-fact.
- Tax Basis Formula: Cash Invested + Recourse Debt - Cash Distributed.
- Non-recourse debt does NOT increase basis, EXCEPT in Real Estate partnerships.
- Deductions cannot exceed the investor's adjusted tax basis.
Tax Basis Calculation Rules
A limited partner cannot deduct losses greater than their tax basis. Basis = Cash Contributed + Recourse Debt (investor is personally on the hook for). Non-recourse debt (mortgages where lender can only seize property) adds to basis ONLY in real estate partnerships.
Knowledge Checkpoint • Section 7.3
An investor invests $40,000 cash into an equipment leasing limited partnership and signs a $20,000 recourse promissory note. What is the investor's initial tax basis in the partnership?